Section Review

McKinley Investments, Inc. v. Middleborough Land LLC: The evolution of the statute of frauds to a more modern approach

Lawrence P. Murray is a partner with Burns & Levinson, LLP, in Boston, where he focuses his business litigation practice on employment, real estate and automotive dealerships.
For many practitioners the mere mention of the Statute of Frauds calls to mind the image of a guillotine when a client presents a claim based on a verbal amendment to a contract to purchase or sell land. Such claims often are put to rest swiftly and decisively by way of a motion to dismiss or one for summary judgment. At its source, the Statute of Frauds plainly states that a party is prohibited from bringing an action “[u]pon a contract for the sale of lands…or any interest concerning them; unless the promise, contract or agreement upon which such action is brought …is in writing and signed by the party to be charged therewith.”1

This ostensibly draconian approach to verbal agreements, which are, in most other arenas, considered on equal footing in the eyes of the law in terms of their enforceability, can be understood in the proper context. The Statute of Frauds was designed so that “parties should not have imposed on them burdensome contracts which they never made, and be fixed with goods which they never contemplated to purchase.”2 In other words, the statute’s purpose is to prevent a person proving by perjury a contract that may never have existed.3

The court in Cummings v. Arnold, however, did not express an intent to do away with the well-recognized principle that parties to a contract may, on new and sufficient consideration before the breach of the written contract, “enlarge the time of performance, or may vary any other terms of the [written contract]…” by subsequent oral agreement.4 Instead, the court applied that principle while giving effect to the Statute of Frauds in what would come to be known as the Cummings rule. In short, the rule holds that a defendant to an action on a written contract to which the statute applies may prove that the time for performance was, upon good consideration and before any breach of the written contract, altered by oral agreement.

The practical application of the Cummings rule to prevent what might otherwise be seen as an injustice by the rote application of the statute materialized not long thereafter in Stearns v. Hall.5 In Stearns, the court permitted suit on performance under a verbal modification to a written contract to which the statute applied. The defendant, having orally agreed to modify the time for payment, refused to receive the money at the new time and maintained as its defense that the statute required enforcement of the original terms for payment as set forth in the written contract. The court permitted the plaintiff to prove the satisfaction of an oral substitution for the time of performance on the assumption that the plaintiff would have performed within the original terms of the written contract if the defendant had not orally agreed to another time for performance.6

The decision in Stearns rested largely on what could be considered equitable principles of estoppel.7 Nevertheless, the Stearns decision represented the genesis for the notion that a plaintiff could seek to enforce an oral modification to a written contract falling within the statute. Ultimately, the Appeals Court would adapt this idea to produce a construct of the statute and the Cummings rule better suited to the complexity and necessities of the modern, commercial purchase and sale of land in McKinley Investments, Inc. v. Middleborough Land LLC.8

That evolutionary process, however, would take many years after Stearns to build the foundation upon which McKinley now rests. At the onset, courts seemed to have little difficulty in applying the Cummings rule in its purest form as a defense to an action on a written contract.9 Similarly, the “exception to the exception” espoused in Stearns, that a plaintiff could seek to enforce an oral modification as to the time for performance under a written contract within the statute, continued to show itself in written decisions.10 With little fanfare, the courts then began to apply the Stearns rule in contexts beyond the narrow exception of the time for performance.

The courts quietly resuscitated the broader implications of the Cummings rule by permitting proof by a plaintiff that terms of the written contract, other than time for performance, were orally modified and agreed to by the parties. In Moskow v. Burke,11 the court acknowledged the right of the parties to “orally modify the time and manner of performance fixed by the contract.12 Similarly, in Siegel v. Knott,13 the oral agreement “changed the method by which the plaintiffs had undertaken to pay their mortgage indebtedness.”14

It was not until the First Circuit decision in the Johnston case that a court synthesized these various elements into a coherent, workable test that could be applied to determine whether a purported oral modification to a written contract would be barred by the statute. The substantive question addressed by the Johnston court was whether the modification to the written contract was merely “substituted performance” or differed so much from the original contract that the proposed oral changes would be unenforceable under the statute.15

The First Circuit acknowledged the Supreme Judicial Court’s limited foray into this expanse in the Rosenfeld case wherein that court explicitly held that the plaintiff could not prove his revised agreement because there was no substituted performance, but rather a substituted contract.16 The court, noted the Johnston case, found that the modification attempted to replace each and every important term of the written agreement with a new term so that the two contracts are “utterly different.”17 Using this rationale as a stepping stone, the Johnston court distilled the analysis down to its most fundamental components by focusing on the fact that although the proposed oral modification changed an essential feature of the written contract, the original contract still, “in the main,” determined the relations and the respective rights of the parties.18

It was still within the ambit of the Cummings rule, said the Johnston court, even though it was more than a mere alteration as to time for payment, to permit the party to prove that the contract term alleged was not that to which the parties finally agreed.19 Thus, the First Circuit grafted the elements of the line of cases expanding the Cummings rule to include modification of terms beyond merely the time for performance onto its test for the enforceability of proposed oral modifications: Do the proposed terms represent substituted performance or a substituted contract?

The Johnston case still involved the defense to a claim on a written contract and not a plaintiff seeking to enforce the terms of an orally modified contract within the statute. A subsequent Appeals Court case, Rex Lumber v. Acton Block Co., would, at first blush, appear to constrict the affirmative case of attempting to enforce oral modifications to a contract only to extensions of time for performance.20 Such a decision created a potential logic vacuum when viewed in the context of the modern commercial land transaction, which typically involved numerous contingencies such as due diligence, testing periods and permitting. Would the parties be constrained to operating solely within the confines of the written contract or written amendment or act at their peril even if that meant not fulfilling the parties’ real intent and purpose in entering into the contract? Rex Lumber specifically left that question open, which eventually would be answered by the court in McKinley.21

In simple terms, McKinley Investments, Inc. had a written contract to purchase and develop a parcel of land under the comprehensive permitting scheme pursuant to Massachusetts General Laws chapter 40B with Middleborough Land LLC. The contract provided for specific milestone dates and variable milestone dates. At the time of execution of the written contract, McKinley provided a $10,000 deposit. The contract contemplated that McKinley would study the feasibility of the project, design a preliminary project plan and seek the requisite government approvals.

McKinley’s actions were essentially divided into two parts: First, a “due diligence” period and, second, an “approval” period. The due diligence period was further divided into two phases. Phase I called for McKinley to design its plan for the number of units and the schedule for obtaining the necessary permits. Phase II of the due diligence period, which expired 30 days after the end of Phase I, permitted McKinley time to do site investigation. If McKinley chose to go forward after Phase II, it was to pay an additional $90,000 deposit.

During the approval period, which followed the end of the due diligence period, McKinley was to seek the permits. If McKinley did not diligently seek and obtain the permits within 12 months, $50,000 of the deposit would go hard. The agreement also called for a six-month tolling of the approval period triggered by the need for any appeal of a permitting decision. The closing for the deal was to then occur 30 days after the expiration of all permit appeal periods.

Phase I was completed without incident and the parties agreed to an extension of the Phase II period at which time the additional deposit was to be paid. The deposit was not paid, but McKinley requested an extension with the additional proposal that money be added to the purchase price for each three-month period of any such extension. The parties then met and discussed the proposals, but reached no agreement. McKinley forwarded a written proposal, through its lawyer, to Middleborough concerning the extensions. The parties met again and discussion continued on the potential extension of the approval period, the amount and timing of any additional payments in connection with the extensions and modification of the appeal period.

Ultimately, the parties agreed to replace the tolling period with a 12-month extension of the approval period and McKinley’s paying $17,500 per quarter for that extension. The parties agreed to move forward and memorialize the agreement at some point in writing. A writing never was executed.

The trial court had granted summary judgment in favor of Middleborough relying upon the Statute of Frauds and ruling that the modifications affected substantive aspects of the agreement that are independent of the time for performance.22 The Appeals Court agreed with the trial court’s characterization of the modifications as affecting time, tolling and price. However, the court held, these changes did not rewrite the contract.23

The Appeals Court adopted the Johnston test and applied it to circumstances involving a party seeking to enforce the terms of a written contract modified by oral agreement rather than simply as a defense to an action on the original terms of the contract. The effect of these changes was to establish substitute performance, rather than a substitute contract.24 In so holding, the court recognized the need for a test that went beyond a fixation on a simple closing date in the context of contemporary land deals. “Here, McKinley’s performance obligations and conditions were, in part, moveable, dependent upon due diligence, and not simply a fixed closing date. The timing and mode of performance were rather typical of a modern Massachusetts land transaction that requires, for accomplishment, governmental permits.”25

The court opined that while at first blush the performance requirements of the written contract were so complex that any modification would be anything but simple, closer examination showed that such modifications were properly viewed as modes of performance modified by subsequent oral agreement based upon valid consideration.26 In reversing the lower court’s ruling, the Appeals Court recognized the sporadic cases in which the courts had upheld the opportunity to prove an oral modification of a written contract’s terms under the statute that were not restricted to the time for performance.27

In McKinley, the Appeals Court has closed the gap left open by the Rex Lumber case. By adopting the Johnston test, the court has explicated the parameters in which the parties to a commercial purchase and sale agreement can expect their contractual relationship to be assessed. The principal design of the Statute of Frauds remains intact, but has been given sufficient elasticity to wrap around the modern land transaction, with all of its contingencies, without breaking prematurely. A party to a purchase and sale agreement may not seek to back away from a deal it may now find unfortunate merely because the relevant terms, orally agreed to, go beyond simply the time for performance. The key inquiry then properly becomes not whether the particular terms can or cannot be pigeon holed into the nomenclature of the time for performance, but rather on the intent of the parties as to whether they were trying to make a new deal or simply modify their existing one.

End notes

1. Mass. Gen. Laws ch. 259, § 1 (1992).[back]

2. Cummings v. Arnold, 3 Met. 486, 490-91 (1842) (quoting Cuff v. Penn, 1M. & S. 26). [back]

3. 2 Corbin, Contracts § 275 at 3 (1950).[back]

4. Cummings, 3 Met. at 6. [back]

5. 9 Cush. 31 (1851).[back]

6. Id. at 8. [back]

7. See Johnston v. Holiday Inns, Inc., 565 F.2d 790, 795 (1st Cir. 1977) (citing Lampsona v. Capriotti, 296 Mass. 34, 38 (1936)). [back]

8. 62 Mass. App. Ct. 616 (2004).[back]

9. See Whittier v. Dana, 10 Allen 326 (1865); Rosenfeld v. Standard Bottling & Extracts Co., 232 Mass. 239, 245 (1919). [back]

10. See Younker v. Pacelli, 354 Mass. 738, 741 (1968); Johnson v. Kelley, 342 Mass. 724, 726 (1961); American Oil Co. v. Katsikas, 1 Mass. App. Ct. 437, 439-40 (1973). [back]

11. 255 Mass. 563, 567 (1926).[back]

12. Id. (emphasis added). [back]

13. 316 Mass. 526, 528 (1944).[back]

14. See also McKinley, 62 Mass. App. Ct. at 630 (surveying this line of cases).[back]

15. Johnston, 565 F.2d at 795.[back]

16. Id. at 795 (citing Rosenfeld, 232 Mass. at 245). [back]

17. Id. (citing Rosenfeld, 232 Mass. at 244).[back]

18. Id. at 796. [back]

19. Id. [back]

20. See Rex Lumber v. Acton Block Co., Inc., 29 Mass. App. Ct. 510, 515 (1990). [back]

21. See Rex Lumber, 29 Mass. App. Ct. at 516 n.6.[back]

22. McKinley, 62 Mass. App. Ct. at 619.[back]

23. Id.[back]

24. Id.[back]

25. Id.[back]

26. Id. at 620.[back]

27. McKinley, 62 Mass. App. Ct. at 620.[back]

©2014 Massachusetts Bar Association